The secondary market for life policies emerged more than 10 years ago with the advent of "viatical" settlements, the buying and selling of policies owned by the terminally ill. A viatical settlement provides the owner of a policy that insures a terminally ill person with the opportunity to convert a life insurance policy into cash, with no restriction on the use of proceeds. A discounted payment is made to the policy owner/insured in exchange for the right to recoup the death benefit. The buyer pays the premiums due on the policy, keeping the policy in-force until the death of the insured. The premise for viaticals gives terminally ill people and their families an option to convert an otherwise illiquid asset into cash when money is needed to help them through their last difficult months.

The "life" settlements market did not emerge until the late 1990s, just after the first viatical securitization transactions. Unlike viaticals, life settlements (also known as senior settlements or high-net-worth transactions) are based on the proposition that some insured individuals no longer want, need or can afford their coverage. Instead of selling the policy back to the originating insurance company at less than market value, or allowing the policy to lapse and forfeiting the value, life settlements allowed another exit option that maximizes the policy owners value. Consequently, life settlements quickly developed into a viable and attractive alternative product.

The market opportunity exists primarily because life insurance companies typically pay low surrender values when a policy owner decides to redeem or cash in the policy. The surrender values are usually so low that Life Settlement Solutions can pay substantially more, yet still achieve returns well above LIBOR (the London Interbank Offered Rate Index). The inefficiency in insurer-paid cash surrender values provides policy sellers with an alternative source of liquidity and buyers with the opportunity for above-market returns.

Life settlements significantly differ from viaticals in two distinct respects: insured eligibility and policy characteristics. A typical viatical policy is classified as one where the insured has a life expectancy less than two years and is terminally ill. By contrast, in a life settlement, the insured may be in moderate or even good health, with a life expectancy in excess of two years. The face value of a typical policy sold through a life settlement tends to be larger. In most cases, the policy must have been issued at least two years prior to the life settlement transaction.

Life settlements are based on actuarial results related to a population that typically includes individuals with life expectancies in the range of 25 to 144 months, which reduces the standard deviation. Life insurance is a time-value instrument with the unknown element of individual term. Regardless, using statistical probability, the average life expectancy of a senior pool can be projected with reasonable accuracy.